Greg Kalil is the founder and managing partner of Stormont Partners, a real estate-focused merchant bank based in Toronto.
It is now widely understood that Canada’s housing market is critically undersupplied. A 2022 study by Canada Mortgage and Housing Corp. reported that the country will need to produce 3.5 million more housing units than are currently in the delivery pipeline by 2030, to restore housing affordability.
Yet it is obvious that we will not be able to correct this situation by 2030, and probably not even by 2040.
To meet CMHC’s target we would need to triple our current rate of production in a system that is already at full capacity. To solve Canada’s housing crisis, we need to address the capacity problem at all levels and all at once, and the task is just too heavy at present.
Housing does not magically appear when there is demand for it. It takes time, infrastructure needs to be built to support it, the construction industry needs to have the capacity to deliver it, and our housing economy needs to hold enough money to fund it – which it does not.
While our response to the housing shortage will be to produce housing in most, if not all, communities in Canada, the sheer numbers dictate that most of this must happen by producing large buildings in large cities. These take a long time to build and are expensive. CMHC’s target number of housing units will cost more than $2-trillion. And coming up with that amount will be a struggle.
It is safe to assume that the financial capital necessary to produce the roughly 250,000 housing units that we do build each year is fully employed and that there is not a lot of uninvested surplus.
So where might the $2-trillion extra funding needed to produce CMHC’s target come from?
Construction is typically funded 75 per cent by lenders and 25 per cent by investors who take up equity stakes. So, approximately 75 per cent, or about $1.5-trillion will need to be funded with debt. We know that this is well beyond the capacity of the banking system, even with the magic of CMHC’s Canada Mortgage Bonds program.
But let’s assume that, because debt is the less risky part of the funding, a solution can be found for it. That still leaves 25 per cent or roughly $500-billion that will need to be funded with investor equity, but from where?
Total pension fund assets in Canada are roughly $2.1-trillion. Insurance companies, which invest in similar ways to pension funds so that they can fund their payouts, have about $1.3-trillion in assets. Both of these groups allocate small percentages of their capital to real estate, generally not exceeding about 15 per cent, and of that allocation, an even smaller number would be directed at development versus real estate with in-place income.
Within these numbers, funds are allocated to various sectors such as office, retail, industrial and residential, and within these allocations, investments outside of Canada make up a significant proportion, so the amount of money directed at Canadian housing is a fraction of total assets.
The size of the publicly listed real estate sector in Canada is about $85-billion. Real estate-focused private equity funds make up a similar amount. But these groups also allocate only a portion to housing, and an even smaller amount to development.
Meanwhile, Ottawa has earmarked only $82-billion over 10 years for housing, and the funds of private investors are already fully committed to current projects.
None of this adds up to the $500-billion in investment that is needed.
So how do we create the needed financial capacity?
Tax changes to encourage an increased level of investment by private, public and institutional investors within Canada, and very importantly, by encouraging foreign investors into our housing market. Canada has an increasing share of the world’s population and it needs more of the world’s capital to go with it.
This is an area where governments need to think very hard. The demonization of capital in the housing market, using terms such as “financialization” and “commoditization” is perhaps headline- or vote-grabbing populism, but it is not based in fact, and it does not address the reality of how housing needs to work.
The collective balance sheet in the housing economy must grow. Let’s quickly develop taxation changes to allow this. Let’s welcome foreign investors. Let’s change the mindset around investment in housing because we cannot build it without money.